Category: Corporate Governance

Yesterday I attended the Annual General Meeting of GoCompare.com Group (GOCO) which was actually renamed GoCo Group at the meeting. This was held in the City of London at 3.00 pm but even so there were still very few ordinary shareholders present – less than ten I would guess.

The company’s main business is a price comparison web service, particularly focused on car insurance, but also covering utilities and other products. It is of course fronted by Italian opera singer Gio Compario in TV advertisements. They also have a “Rewards” business providing discount vouchers which they recently acquired and a new business called WeFlip that automates utility switching. The company is chaired by Sir Peter Wood, founder of Esure and Directline insurance companies and he recently purchased about 4% of the business.

Sir Peter introduced the board and then invited questions. I was the only shareholder who asked any questions and I focused on the remuneration. For some background it’s worth noting that the CEO, Matthew Crummock, received a total (single figure) remuneration of £1.59 million in 2018. This is for a company that had revenue of £152 million and pre-tax profits of £33.8 million last year. For 2019 his basic pay will be increased by 12.5% to £450,000 and his maximum opportunity on an LTIP from 200% of salary to 230%. He also gets an annual bonus and “PSP” awards. A typically very complex scheme which results in a 19-page Remuneration Report!

I asked why awards under the “Foundation” bonus scheme were made when the performance targets were not met. It was stated that they were only £1 million short on revenue so the remuneration committee decided to award the bonus and the board supported it.

I also asked about the non-specific Bonus and PSP targets for 2019 given on page 57. What were the “Selection of people and cultural measures” and the “Customer centric measures”? At this point the Chairman suggested that these questions be handled after the meeting but I insisted they should be answered then which he conceded. Some reasonable answers were then given. But I advised the Chairman that I would be voting against the Remuneration Report as I considered it too generous.

Voting was then taken on a poll. But the Chairman advised there were substantial votes against the Remuneration Report on the proxy counts. In fact there were 25% of votes against the Remuneration Report and 15% of votes against Angela Seymour-Jackson who chairs the Remuneration Committee. There were also 11% of votes against Non-Exec Zillah Byng-Thorne perhaps because she is also CEO of Future Plc and also a non-exec at Paddy Power Betfair – too many jobs I suggest.

I spoke to Angela Seymour-Jackson after the formal meeting. She said she was disappointed that institutional shareholders voted against the Remuneration Report. She mentioned the payment of a bonus when the performance target was not met was one reason. I said a bonus target is a target that should be met, otherwise the bonus should not be paid. There will likely be more consultation with investors.

I also explained that I dislike LTIPs because they have been one reason why executive pay has ratcheted up in the last few years, and I particularly dislike those that pay out more than 100% of salary. I told her that bonus schemes need to pay out quickly if they are to provide real incentives, i.e. within months not years. She said they were constrained by the guidance in the Corporate Governance Code. Comment: in fact the latest version of the code does not mandate LTIPs and in any case the Code is always a “comply or explain” system. Companies can adopt better systems if they choose to do so and explain why.

This company is a typical example of why executive pay is out of hand and there is no sign that the directors of such companies are likely to change their ways. The widespread public concern over excessive pay and over-complex remuneration schemes that might pay out very large sums has not yet resulted in any change of policy and remuneration committees are still a soft touch. Change is needed.

Otherwise this was a poor quality meeting – no trading statement issued on the day, no presentation, and minimal shareholder attendance. But I did pick up from talking to one of the directors that the WeFlip business, in which the company is investing millions this year, is ahead of internal targets. But the company will win no prizes for its corporate governance.

The Government BEIS Department have recently proposed a number of important changes to the way Companies House operates in a public consultation entitled “Corporate Transparency and Register Reform” (see https://tinyurl.com/yysf9gdn ). Here’s a brief summary of the main points:

This consultation will be of interest to anyone who is a director of a private or a public company, or a major shareholder in such a company (i.e. those People with Significant Control). Even directors of the smallest companies could be affected.

A major proposal is to verify the identity of directors and to collect more information on them (although not their email address apparently, which I have suggested be added). This can now be done very quickly and at minimal cost electronically using various verification services (e.g. listed GB Group in which I hold shares). This will help to prevent fraud and they even hope to be able to link all directorships in various companies together. For example, this might make it easier to track the past activities and record of directors which even in small listed companies can be very informative as to their competence and reliability.

They propose to continue to retain the records of dissolved companies for 20 years which many investors consider important and is useful for investigators of all kinds.

They also plan some changes to improve the protection of personal information held at Companies House. Bearing in mind that there are well over 6 million records of directorships, with significant personal information, this is clearly important.

For public company investors there are two significant proposals:

1 – Improved digital tagging standards for accounts, which might make it simply to provide information services based on them.

2 – A possible cap on the number of directorships any one person can hold. There are common complaints about “overboarding” where directors take on too many roles. I have suggested a maximum of 5 in public companies, with some possible exemptions, should be imposed.

In general the proposals seem eminently sensible and I suggest they be supported on the whole. You can see my detailed comments in a response submitted to the consultation here: https://tinyurl.com/y6j9u4do

But you should of course submit your own comments on those points of interest to you.

There was a surprise announcement this morning of a possible offer for Share Plc(SHRE) who run the Share Centre. That is a very popular platform with private investors because it is low cost and administratively efficient but also because it is one of the few investment platforms that makes it easy to vote your shares held in nominee accounts such as ISAs. Takeovers of investment platforms are never popular with customers because it means having to learn one’s way around a new web/IT system and charges may also change. More consolidation of platforms will also reduce competition in this sector.

The offer is from Interactive Investor but it looks like they may have some difficulty even if founder Gavin Oldham supports it. He, his family and associated trusts held 69% of the share in December 2018 but there was also 18% held by staff and customers.

Yesterday I attended a roundtable at the Financial Reporting Council (FRC) to discuss the “Future of Corporate Reporting”. It was mainly attended by experienced private investors who I won’t name individually. But there was a consensus on many of the issues discussed. I will highlight some of the interesting points that arose:

There was widespread concern about the size of Annual Reports and the excessive “padding” and use of “boiler-plate” content. It was clear that most of the investors attending skipped large sections of most Annual Reports.

One even went so far to say that he always went to the accounts filed by a company at Companies House which often differed from that in the Annual Report and also contained more information. This is surely an issue that should be looked at by the FRC. It is surely not acceptable that there should be any difference.

There was a general view that commentary by the Chairman or CEO tended to be over-optimistic and that risk reporting was full of platitudes while ignoring the really big risks that a company faced. The Macando oil-well disaster at BP and the recent problems at Boeing with the 787Max were mentioned as examples.

Other particular issues raised were the valuation of intangibles on the balance sheet, the long-standing complaint that IFRS standards were inconsistent with Company Law (but the FRC has limited input to IFRS standards), the lack of disclosure of long-term debt terms, and the failure to disclose banking covenants.

There were also complaints about private investors being excluded from receiving some information disclosed to analysts by companies, and refusal for attendance at company presentation events. The lack of an equivalent rule to that in the USA (Regulation FD on Fair Disclosure) was a major problem.

As regards excessive size of Annual Reports, the FRC staff suggested that splitting up the Annual Report into sections might assist although I said that did not really solve the problem of excessive size and irrelevant content.

Reporting of ESG factors was discussed but this seemed to be a difficult area due to the lack of standards and the ability of companies to only present positive information.

The FRC does undertake quality reviews on large company audits and perhaps a scoring system for Annual Reports could be introduced to raise standards. But it is all too easy at present for company directors to throw masses of superfluous information into the Annual Report to distract investors from the really important facts. I suggested that there be a word or page limit on sections of the Annual Report to ensure that only key information was communicated. For example, do we really need 30+ pages of Remuneration Report as we are now getting at some companies? Where companies wished to provide more detailed information, that could perhaps be given on their web site.

In summary this was a useful meeting to raise the concerns of experienced and knowledgeable investors. Let us hope that the FRC will take up some of these issues.

Shareholders in the Royal Bank of Scotland (RBS) will have received their Annual Report and Notice of the AGM in the post today. The meeting is on the 25th April for those in a nominee account, and its being held at the RBS headquarters in Scotland of course.

There are 28 resolutions on the Agenda. Please ensure that you vote your shares. Resolution Number 28 directs the board to appoint a Shareholder Committee and was put forward jointly by ShareSoc and UKSA. The board has again opposed that resolution on spurious grounds. A Shareholder Committee would provide a say on such matters as director nominations, remuneration and strategy and that resolution should be supported by all thinking shareholders. See this document for more explanation and a list of the resolutions: https://www.investors.rbs.com/~/media/Files/R/RBS-IR/results-center/letter-to-shareholders-2019.pdf

Corporate governance at RBS is still poor and a Shareholder Committee would cure that. The Financial Times today highlighted one remuneration issue which is that the CEO, Ross McEwan will receive a pension contribution this year of 35% of salary, i.e. £350,000. This seems to be the latest wheeze to avoid scrutiny of high pay with other major UK banks paying similar amounts. So another recommendation is to vote against the Remuneration Report (Resolution No. 2).

Personally I will also be voting against the authorisation of share buy-backs (Resolutions 26 and 27), and against the resolution that permits General Meetings at 14 days notice (No. 24), as I always do.

I will also be voting against the Chairman Howard Davies (Resolution 5) for opposing Resolution 28.

Today I attended the Annual General Meeting of Safestore Holdings Plc (SAFE) in Borehamwood. Their head office is next to one of their self-storage units. They now have 146 stores with a concentration in London/South-East England, and in major UK cities, plus some in Paris.

The Chairman, Alan Lewis, commenced the meeting with a very brief statement. He said 2018 was a good year with good strategic progress. He is confident value creation will continue. Note that Mr Lewis is stepping down as Chairman and they are looking for a replacement as he has now served for 9 years.

Safestore is a growing company in a growing sector. As people accumulate more junk, house sizes shrink and more people live in flats, they run out of space for their belongings. The demand is also driven by divorce and death. In addition to personal users, small businesses find such facilities useful to store goods, tools & equipment, or display material.

Revenue was up 11% last year, and earnings up 125% (or as this can be seen as a property company, EPRA earnings were up 15.5%). The dividend was increased by 13.8%. Self-storage companies can be perceived as property companies but they are best viewed as operating businesses in my view (the CEO seemed to agree with that). The market cap is way higher than the book value of the assets unlike in most property companies of late. Self-storage is one of the few growth areas in the property sector at present.

Page 8 of the Annual Report gives some information on the market for such facilities. Compared with say the USA, the UK storage space per head of population is only a small fraction of the USA. In other words, the UK market is relatively immature and to reach the same level as the USA would require another 12,000 stores!

I asked the Chairman why the company did not expand more rapidly if the potential is there? The response from the CEO was that there were problems with finding suitable new sites and with planning restrictions. They are also conservative on finance. A question on potential acquisitions arose as it is a fairly fragmented market in the UK but it seems few such opportunities are reasonably priced and meet the quality criteria they have. They did take over Alligator last year. Competitors don’t seem to be growing any more rapidly, and the CEO suggested they were gaining market share.

The main other question I raised was about their Remuneration scheme. At the 2017 AGM they only just managed to win the Remuneration Policy vote and at the 2018 AGM the Remuneration resolution was again just narrowly voted through. Remuneration Committee Chairperson Claire Balmforth explained that institutional investors were unhappy with the LTIP and the “quantum” of pay – that’s a polite way of saying it was too high. Indeed remuneration at this company is high in relation to the size of the business – the CEO received a total pay of £1.6 million last year (single figure remuneration). Even the Chairman received £135,000.

However it’s apparently all change after extensive conversations with institutional investors. The executive directors have agreed changes to the LTIP and a “more conventional” LTIP will be introduced in 2020. As a result they did better on the remuneration vote, and the votes on the re-election of Balmforth and Lewis, with the Remuneration resolution passing with 70% support.

It was not until later when I chatted to the directors that I discovered where I had come across Claire Balmforth before. She used to be HR Director, then Operations Director, at Carpetright when I held shares in that company.

Anyway I gave them my views on remuneration. Namely I don’t like LTIPs at all, particularly those that pay out more than 100% of base salary. I prefer directors are paid a higher basic salary with an annual bonus paid partly in cash, partly in shares.

Other than the pay issue, I was positively impressed as a result of attending the meeting.

One issue that arose was the poor turnout of shareholders at the meeting. There were more “suits” (i.e. advisors) than the 3 ordinary shareholders (two of those were me and son Alex). Now it happens that earlier in the day I was watching a recording of the annual meeting of Fundsmith Equity Fund which I had not been able to attend in person this year. Terry Smith was in his usual good form, and he said there were 1,300 investors at the meeting. That’s more than any other UK listed company or fund (most funds do not even have such meetings). An amusing and informative presentation helps enormously to attract investors of course. I wish all companies would bear that in mind.

Anyone who wishes to learn how to make money in stock markets should watch it. Terry Smith has a remarkable record at Fundsmith. He said last year was not a vintage year as the fund was only up 2.2%. But that beat their benchmark and only 7.8% of UK funds generated positive returns last year. In the top 15 largest UK funds over 3 and 5 years, they are the clear winner.

A major announcement that will impact investors was made yesterday by the Government. You may not have noticed it in the midst of political turmoil, but it’s worth studying.

The Kingman review of the Financial Reporting Council (FRC) was published last December. It was a quite damning criticism of many aspects of the current regulatory regime that had resulted in so many audit failures and poor-quality financial reporting. See my previous blog post on this subject here: https://roliscon.blog/2018/12/18/all-change-in-the-audit-world/

There are few experienced investors who have not suffered from audit failures in the last few years. Accounts need to be accurate, reliable and trustworthy but they have been far from that in the last few years. It is now proposed that the FRC, which regulates the audit world and sets accounting and corporate governance standards, be scrapped and replaced by a new body to be called the Audit, Reporting and Governance Authority – ARGA as it will no doubt be abbreviated to. ARGA will have stronger powers, a new mandate and new leadership.

There is a public consultation on the proposed new body and supporting legislation which can be obtained from here: https://tinyurl.com/y55a376d . Anyone with an interest in improving auditing, and preventing company failures such as those at Patisserie or Carillion and major banks in 2008 should respond. But there are so many changes proposed that the document may take time to digest. I pick out some of the more important ones below:

A new Chairman and Deputy Chairman are being recruited to head ARGA so there will be change at the top. Let us hope they manage to change the culture of the FRC even if many of the FRC’s staff move into the new body. It needs to be more than a change of name.

The ARGA will have clear statutory powers with a clear purpose and objectives, supported by a “remit letter” from the Government. One objective will be “to protect the interests of users of financial information and the wider public interest…” which is a positive statement and replaces the unclear historic accumulation of limited powers by the FRC.

The new board responsible for the ARGA will be smaller, more diverse and less representative of “stakeholder” interests. Let us hope that this means less dominated by major audit firms and the audit profession.

The Audit Firm Monitoring Approach will be put on a statutory basis and with enhanced skills and seniority in the team. There are also proposals to improve the Audit Quality Review system which sound promising although such reviews only affect large companies. There will also be expansion of Corporate Reporting Review activity focused on higher risk companies and the new regulator will have the power to change accounts without going to Court.

The “audit expectation gap” where, for example, investors expect auditors to detect false accounting or even fraud whereas auditors don’t perceive that as part of their job will be reviewed. There is indeed a problem with the failure of auditors to challenge the information they receive from management and the latter’s forecasts and interpretation. Let us hope that is a meaningful independent review that results in some changes.

A new “pre-clearance” system will be introduced to enable companies and their auditors to obtain approval for “novel and contentious matters in accounts in advance of their publication”. This may assist auditors to “pass the buck” to someone else if they have doubts about how to present the financial figures.

More transparency in the new body is encouraged on such matters as disclosure of undertakings from concluded cases and it will become subject to the Freedom of Information Act. There will also be more publication of information on complaints and improved handling of them. Such changes are to be encouraged to stop the current secrecy under which the FRC operates which frustrates investors.

The oversight of the accountancy profession is proposed to be improved although the details are unclear and it may require primary legislation. The wording suggests that audit firms may escape substantial change.

The prevention of corporate failure is to be tackled by developing a market intelligence system to identify emerging risks in companies. This will enable a change from a purely historic analysis of corporate failures which is rather like shutting the stable door after the horse has bolted to a more proactive, future-looking approach. Auditors may also be required to warn of concerns about viability.

The AARG will be able to commission a “skilled person review” where concerns are raised about a company. Details of how this will operate are to be determined, but this appears to be a useful step forward. The cost would be charged to the companies where it is invoked.

The Government accepts that there is merit in improving internal company controls by something along the lines of the US Sarbanes-Oxley regime. They will explore options in this area and do a consultation on it in due course. This is a welcome move and I covered the benefit of such a change in a previous blog post: https://tinyurl.com/yxmx9gzg

It is proposed to improve “viability” (i.e. “going concern”) statements and the FRC has been tasked with taking that on immediately. Such statements are certainly ineffective at present and could be improved in several ways, e.g. to avoid the “all or nothing” approach at present. Such questions are not simple black and white issues in most cases.

It is proposed to replace the existing, and most peculiar, voluntary funding arrangement of the FRC with a new statutory levy for the ARGA. This is surely welcomed as money is the key to improving many of the regulatory functions. It is clear that the FRC is under-resourced in terms of the numbers and skills of staff.

In summary, most of the recommendations in the Kingman review are being taken forward.

Comment: These long-overdue reforms are certainly welcomed and the Government does seem to be applying some urgency to them, although with a log-jam in Parliament at present it may take time to get some of the needed statutory law changes in place. But cultural changes in organisations are never easy. Old bad habits in the FRC may persist, while it remains to be seen whether adequate funding will be put in place for the ARGA. There is also a lot of detail yet to be worked out. Let us hope it is a case of welcome to ARGA and not AARGH when we learn the details.

I have been advised that life insurance and pension consolidator Phoenix Group (PHNX), a FTSE 250 company, is holding this year’s AGM in Edinburgh at 9.00 am. That’s a damn inconvenient time and location for most investors. Previous general meetings have been held in London where their registered office is located, although I am told that only one director and no shareholders turned up for the 2018 AGM.

This is the explanation given by the company for the latest venue in the Annual Report: “Our three general meetings in 2018 were held in London. Following the acquisition of Standard Life Assurance, our 2019 Annual General Meeting will be held on 2 May 2019 in Edinburgh, which is now our largest operational centre”. But it’s surely where investors are located rather than operations that matter.

It is undoubtedly time for some standards to be imposed on the timing and location of AGMs because setting a time of 9.00 am suggests they wish to deter shareholders from attending. Why not 2.00 pm which at least would give any shareholder in the UK some chance of getting there without an overnight stay?

There also needs to be more encouragement to attend by the promise of a presentation on the affairs of the company and the attendance of all directors so that questions can be fully answered. Institutional investors should also have an obligation to attend. This practice of trying to turn AGMs into meaningless events needs to be stopped in the interests of improved shareholder engagement.

Going Concern

Auditors have to confirm in their audit reports published in companies Annual Reports that the business is a “going concern”, i.e. will be able to continue trading for the foreseeable future. Any uncertainty in that regard has to be disclosed. But that did not prevent the unexpected collapse of companies such as HBOS, BHS and Carillion. Such events can be very damaging to both investors and suppliers.

Comment: The proposed changes to the standard may improve matters but company management will be absolutely horrified with any suggestion they are not a going concern. For a bank it might produce a “run” on the bank and a serious downgrade of its credit rating. For a trading company it would mean suppliers might refuse to trade with it. As a result the management will take enormous effort to convince the auditors they are a going concern, and auditors will be under severe pressure to agree. Such pressure, when companies hire and pay the auditors at present might be irresistible.

There is also the problem that auditors can have built a relationship with the appointing company and its management over several years. They may not be of a nature, or have the inclination, to challenge management. Unless tougher sanctions are imposed on auditors who are too easy going, when collapses take place soon after a clean audit report, I doubt much will change.

GoCompare

I covered the preliminary results of GoCompare (GOCO) on the 28th February. Subsequently there was some director share buying and this morning it was announced that Chairman Sir Peter Wood had bought shares. In fact he purchased 17.8 million shares – about 4% of the company thereby raising his stake to 29.9% (i.e. the limit before he is obliged to make an offer for the company). The announcement quotes Sir Peter: “My share purchase underlines my view, which is shared by my fellow Board members, that the current Gocompare share price does not fully reflect the operational and strategic momentum in the business. I’m particularly excited about our weflip brand and the potential opportunities it offers. If we deliver on our wider Savings as a Service strategy it will be brilliant for savers everywhere, reinforcing my decision to increase my holding to 29.9%.”

The share price jumped 7% this morning, but if there is a big buyer then there is also a big seller of course. However, insiders might have a better view of the future prospects for the business.